The taxable yield on plans with life insurance companies and pension funds covered by Section 1(1), Item 1 of PAL is determined as the difference between the value of the policy's custody account at the end of the year of taxation (end-of-year custody account) adjusted under Section 4(3) of PAL and the value of the policy's custody account at the beginning of the year of taxation (beginning-of-year custody account) adjusted under Section 4(4) of PAL.

See also sections

• B.3.1, Basis of taxation in respect of plans with life insurance companies and pension funds
• B.3.2.1.2, Adjustment of the custody account at the beginning and end of the year of taxation

As a general rule, the policy's custody account corresponds to the retrospective provision. The custody account is determined as:

+       paid-up insurance premiums,

+       transfers from special bonus provisions,

÷       cost and risk premium, including negative bonus in respect of these elements,

÷       fees,

+       interest in accordance with the plan,

+       cost, risk and interest bonus,

+/÷    increase and reduction of provisions in case of the occurrence of the insured event, and

÷       any insurance payments.

See Section 4(2) of PAL.

Bonus stems from a surplus from the interest, risk and cost elements. Cost and risk premium means all the agreed risk and cost premiums which must be fixed satisfactorily under the Danish Financial Business Act (Lov om finansiel virksomhed) (Danish Consolidation Act no. 1413 of 10 December 2007) and the Danish Supervision of Company Pension Funds Act (Lov om tilsyn med firmapensionskasser) (Danish Consolidation Act no. 1561 of 19 December 2007).

The custody account constitutes the basis for insurance payments and forms the basis for the calculation of the surrender value (if this is possible). In that sense, the custody account reflects the size of the legal claim which the policyholder/pension fund member has against the company. Ultimately, the legal claim follows the contractual basis applying to the pension plan in respect of the payment of certain benefits on the occurrence of an event, e.g. attained pension age, incurred degree of disability, surrender etc.

Policies containing benefits with entitlement to disability pension providing a regular income and/or premium exemption can be treated as if the insured event has not occurred. For such policies, an increase in the provision is thus exempt when determining the custody account. See B.3.2.3, Special conditions in relation to policies with entitlement to disability pension providing a regular income or premium exemption

The policy's beginning-of-year and end-of-year custody account must be adjusted under Sections 4(3) and (4) of PAL. See section B.3.2.1.2, Adjustment of the custody account at the beginning and end of the year of taxation

The purpose of Section 4 of PAL is that the entire return on the custody account of the person liable to taxation is subject to taxation. In a normal situation, the return will stem from the part of the life insurance company's asset yield which is attributable to the insurance portfolio. The provision entails that, following adjustments, pension plan holders in life insurance companies and pension funds are liable to pay tax on increases in the custody account which are attributable to the accrual of interest in accordance with the plan and interest, risk and cost bonuses. In cases where it can be documented that a bonus is due to a surplus from the risk and cost elements, however, pension plan holders are liable to pay tax only on the agreed interest and interest bonus.

In order to describe the difference between the taxation of traditional insurance and pension fund products and the taxation of unit-linked plans, the following excerpts from the comments on Section 4(3), Item 11 of L 10 of 28 November 2007 are reported below:

In traditional life insurance/pension fund products, interest is paid in advance in accordance with the plan on the life insurance company's asset yield. Interest bonus is credited to the insurance portfolio/pension fund members in years with high investment yields - either directly to the life insurance provisions/pension provisions or to the company's non-allocated provisions. In this context, the interest in accordance with the plan and the interest bonus reflects the policyholder's/pension fund member's share of the total asset yield of the life insurance company/pension fund and thus the asset yield from the individual's pension savings.

Unit-linked plans are usually taken out without any form of guarantee, and the return depends on the yield on the underlying pool assets. The entire yield for the year - positive or negative - is normally added to the custody account. However, it is possible to agree on a different arrangement; for example an evening-out of the yield over time. A guarantee attached to the plan will typically be in the nature of a disbursement guarantee, which means that the guarantees will be settled at the time of pensioning. If a guarantee is attached to a unit-linked plan, tax is levied on any increases in the custody account which are attributable to the realisation of the guarantee. The realisation of the guarantee is deemed to constitute accrual of interest in accordance with the plan, which increases the end-of-year custody account.